Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

What Does Obama's Clean Power Plan Mean for Utilities?

Obama to utilities: It's time to come clean.

Last Monday, President Obama announced America's first-ever clean power plan. Its regulation will reach every energy stock in existence, and some are more prepared than others. Here's what you need to know.

The motivation"No challenge poses a greater threat to our future [...] than a changing climate." As President Obama puts it, America has been setting a lot of records lately -- but not good ones. Extreme temperatures, severe weather, increasing air pollution -- these are all issues the POTUS believes are caused by humans and the carbon we emit.

Our emissions emerge from a motley crew of culprits, but chief among them are power plants -- 32% of our nation's greenhouse gas emissions come from electricity generation.

Source: Whitehouse.gov.

The planTo de-carbonize our energy economy, the president has set his sights on three main strategies: 1) improve the heat rate of existing coal-fired power plants, 2) switch out coal for natural gas and 3) ramp up renewable energy generation.

The plan will vary by state, allowing each entity to choose which metrics and strategies work best for them (within the confines of a larger mandate, of course). If all goes as planned, power plant carbon pollution in 2030 will be one-third of what it was in 2005 -- solid progress on something many think we're already too late to address.

The impactWhen it comes to opinions, no sector is more divided than utilities -- and there's a simple reason for that. Some utilities will benefit from the Clean Power Plan, while others will lose. Generally, more diverse utilities will fare better, as will those who have already retired coal power and expanded their renewable energy portfolios.

Geographically, multi-state utilities will enjoy some flexibility to "mix and match" across their assets. Since power plants are part of interconnected energy grids, the EPA based key components of its mandate on pre-existing regional electricity interconnects. The Clean Power Plan also provides opportunities for emissions trading at the plant and state level, essentially giving carbon-intensive plants in one state the option of buying emission rate credits from a cleaner energy source elsewhere.

Source: EPA.gov

Take NRG Energy (NYSE:NRG), a Fortune 200 corporation with $40 billion in assets and nearly 3 million recurring retail customers. Historically a coal-centric big-infrastructure utility, NRG Energy, has transformed itself in recent years to become a veritable poster child for Obama's Clean Power Plan. It's loaded up on natural gas, expanded its solar capacity to 1,200 MW, and has an entire business unit devoted to capitalizing on solar, wind, and microgrid projects around the world.

Source: NRG Energy,

It's embraced the possibility of utilities as a customer-facing, dynamic corporation ready to expand its power portfolio beyond traditional electricity generation. It has one of the largest private electric-vehicle charging networks in the nation and offers its own in-house zero-money-down solar rooftop systems in 12 states. NRG Energy has predicted Obama's Clean Power Plan perfectly, and it will have to do next to nothing to comply across its corporation.

For some other utilities, compliance isn't black and white. Georgia-based Southern Company (NYSE:SO) is decidedly a coal-centric corporation. With 42% coal generation and 39% natural gas, its coal-to-gas transition is far behind NRG Energy's. But Southern Company has bet big on a $5 billion "clean coal" power plant in Mississippi that could put coal back on Obama's clean power plan map. If Southern manages to cut carbon emissions from coal-fired power plants, it could be a first mover to retap a vast energy supply no one else wants to touch. But the plant has been plagued with setbacks and shortcomings, and the future of clean coal remains a black box.

Source: Southern Company; Kemper "Clean Coal" Power Plant.

Other companies are neither as progressive as NRG Energy nor as coal-centric as Southern Company. Duke Energy Corp. (NYSE:DUK) has already retired 15 of its less efficient coal-fired units, with potential plans to drop five more. Duke Energy Corp. is switching out most of its coal with natural gas. In May, for example, it announced a $1.1 billion plan to replace a 376 MW North Carolina coal plant with 650 MW of natural gas capacity.

According to some estimates, that plan already makes sense-natural gas is cheaper to run than coal. But the Clean Power Plan may speed up the switch, pushing Duke Energy and other utilities to forfeit sunken costs from existing coal-fired power plants and invest in alternative (and now cheaper) energy sources at a faster rate and greater scale than they otherwise would be today.

Not better, not worse -- just differentObama's Clean Power Plan did not come as a shock to utilities. Rather, it's a reinforcement of trends the sector has already seen. Those with forward-looking business models will come out ahead, while corporations digging their heels in will get yet another nudge to shift their strategies toward the new energy economy. Utilities may not be the safeguard dividend stocks they once were -- and that's OK.

The Clean Power Plan reinforces a future we all want to see, and long-term investors who pick progressive power companies will reap rewards in the years to come.